The Forecast for Emerging Markets Monday, April 27, 2009 09:30 AM - 10:45 AM Moderator Komal Sri-Kumar, Managing Director, Chief Global Strategist, TCW Group Inc.; Senior Fellow, Milken Institute Speakers Hüseyin Erkan, Chairman and CEO, Istanbul Stock Exchange George Hoguet, Global Investment Strategist, Senior Portfolio Manager, State Street Global Advisors Vikas Kapoor, President and CEO, iqor Inc. Vasant Prabhu, Executive Vice President and Chief Financial Officer, Starwood Hotels & Resorts Worldwide Inc. Jean-Louis Scandella, Emerging Markets Fund Manager, Comgest Group 1
Global real GDP growth World real GDP growth is projected to decline by 1.3% in 2009 Percent change, year-to-year 10 8 6 4 2 0-2 -4-6 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: World Economic Outlook, International Monetary Fund, April 2009. Emerging and developing economies Advanced economies World Projected 2
Developing countries growth forecasts Percent change from previous year 8.0% 6.0% 4.0% 2.0% 2009 2010 1.5% 2.2% 3.3% 4.3% 3.7% 6.2% 2.4% 4.1% 5.3% 6.6% 0.0% -2.0% -2.0% -0.6% -4.0% Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa East Asia & Pacific Source: World Bank, March 2009. 3
China and India growth forecasts Real GDP growth (%) 14 12 China Projected 10 9.0 8 6.5 7.5 6 India 5.5 7.0 4 4.0 2 1.5 0 0.7-2 High income OECD countries -4-3.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: World Bank, March 2009. 4
Global deflation risk has now risen Percent change of consumer prices (year-to-year) Percent 10 8 Emerging and developing economies 6 4 World 2 0 2002 2003 2004 2005 2006 2007 2008 2009 Source: World Economic Outlook, International Monetary Fund, April 2009. Advanced economies 5
Will emerging markets lead a global rebound? China, Brazil and Russia stock markets ended the first quarter 2009 with gains Stock market returns, quarter-to-quarter (%) 50 Shanghai SE A share Brazil Bovespa 30 Russiarts S&P 500 10-10 -30 12.7 5.8-2.4-19.0 11.6 3.6-6.6-17.8-9.2-13.4-21.9-20.6-22.2-24.6 30.3 9.0 9.1-11.7-50 -46.0-46.9-70 Source: Datastream. Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 6
Will emerging markets lead a global rebound? Year-to-date stock market returns (%) Year-to-date returns (%), as of April 21, 2009-6.6-9.3-9.5-9.8-13.1 9.0 6.0 2.9 24.2 22.7 22.3 Advanced economies Emerging markets 39.1 China Shanghai Composite Taiwan Taiex Russia RTS Brazil Bovespa India BSE Sensex Argentina Merval Mexico Bolsa U.S. S&P 500 U.K. FTSE 100 Japan Nikkei 225 U.S. Dow Jones Germany DAX -25-15 -5 5 15 25 35 45 Source: Bloomberg. 7
Consumer confidence index China s consumer confidence dropped slightly amid the U.S. credit crisis Index (1985 =100) 160 140 120 100 80 60 40 China consumer confidence index U.S. consumer confidence index 120 100 80 60 40 20 Feb 2000 2001 2002 2003 2004 2005 2006 2007 2008 Feb 2009 Source: National Bureau of Statistics, China, Bloomberg. 20 8
Emerging market stocks fell by more than those in industrialized nations January 2005 = 100 280 240 Emerging markets 200 EU 160 120 80 40 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 World Oct 07 Jan 08 U.S. Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Source: Datastream. 9
Emerging market bond spreads widened dramatically Yield difference between emerging market bonds and U.S. Treasuries Basis points 2500 2000 U.S. financial crisis started, August 2007 Lehman Brothers filed for bankruptcy, September 14, 2008 1500 1000 500 B rated BB rated Investment grade 0 Jan 2007 Apr 2007 Jul 2007 Oct 2007 Jan 2008 Apr 2008 Jul 2008 Oct 2008 Jan 2009 Apr 2009 Source: JP Morgan Emerging Markets Bond Index Global (EMBI Global). 10
Performance of emerging bond markets by region Quarterly total return of JP Morgan bond index (in percent) Percent (quarter-to-quarter) 15.0 11.4 10.0 5.0 0.0 7.6 5.3 5.6 0.8-5.0-10.0-7.6-7.2-3.6-9.2-5.1 Middle East Asia Latin America Africa Europe -15.0 2008Q4 2009Q1 Source: JP Morgan Emerging Markets Bond Index Global (EMBI Global), The Milken Institute. 11
Foreign exchange reserves (in US$ billions) Most recently available data, as of March 2009 China Japan Russia Taiwan India South Korea Brazil Eurozone Hong Kong Singapore 376 (5.7%) 294 (4.4%) 238 (3.6%) 203 (3.0%) 203 (2.9%) 191 (2.9%) 177 (2.7%) 164 (2.5%) 980 (14.8%) 1946 (29.3%) Source: Bloomberg. 0 500 1000 1500 2000 US$ Billion (% of world total reserves) 12
Real effective exchange rate movement Percentage change; most recently available data as of March 2009 Advanced economies (change from 02/08 to 02/09) Emerging markets (change from 12/07 to 12/08) Sweden UK Canada Australia Euro US New Zealand Japan Hungary Poland Turkey Mexico India S. Africa S. Korea China -40-20 0 20 40-40 -30-20 -10 0 10 20 Sources: Datastream, International Financial Statistics. 13
Foreign exchange rate vs. U.S. dollar Emerging Asia US$ per local currency (Jan 2008 = 100) 120 Chinese yuan 110 100 90 Indonesian rupiah Philippine peso 80 70 60 Indian rupee S. Korean won 50 Mar 2008 Apr May Jun July Aug Sep Oct Nov Dec Jan Feb Mar 2009 Source: Datastream. 14
China, India and U.S. stock markets These markets lost far more than half of their value from the peak Percentage lost in value from the peak 5-15 Dow Jones: - 54% (3/9/2009: 6,547) -35-55 -75-95 1 2 3 4 5 6 7 8 9 10 11 12 13 Sources: Bloomberg, the Milken Institute. Bombay SENSEX index: - 60.9% (3/9/2009: 8,160) Shanghai SE index: -72% (11/4/2008: 1,793) Months after the peak 15
Capital flows to emerging markets suffer large declines in 2008 US$ billions 80 70 60 50 40 30 20 10 0 Emerging Asia Middle East 2002 2003 2004 2005 2006 2007 Q4 2008 Sources: International Monetary Fund. Emerging Europe Latin America 16
World trade volume World trade volume is projected to decline by 11% in 2009 Percent change, year-to-year 15 Projected 10 5 0-5 -10-15 World trade volume (goods and services) 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: World Economic Outlook, International Monetary Fund, April 2009. 17
Vikas Kapoor s Slides 18
B.P.O. industry segments Business Specific Services Functional Services Other Business Financial Services: 9% Services: 6% Insurance Processing: 5% Payment Processing: 11% Other Functional Services: 8% HR: 8% CRM Services: 21% ARM Services: 12% Help Desk: 6% Other Voice & Services Finance & Accounting: 10% 4% Voice Services Total = $150+ Billion 19
Voice services growth Growth EBITDA Margin CAGR: 13.4% ` 20
Valuation volatility 11.2x 13.0x 12.4x 14.0x 9.9x 10.5x 8.8x 7.1x 6.7x 7.6x 5.2x 8.0x 8.1x 6.9x 4.5x 3.6x 6.0x 6.3x 6.6x 6.3x 5.3x 4.9x 4.9x 5.0x 4.4x4.5x 3.7x 5.2x 6.8x 8.4x 9.5x 7.9x 6.9x 6.4x 4.5x Mar 00 Jun 00 Sep 00 Dec 00 Mar 01 Jun 01 Sep 01 Dec 01 Mar 02 Jun 02 Sep 02 Dec 02 Mar 03 Jun 03 Sep 03 Dec 03 Mar 04 Jun 04 Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Note: Universe consists of Convergys, TeleTech, ICT Group, Sykes Enterprises and APAC Customer Services. 21
Value chain: insight or fallacy? As India's top companies get more sophisticated at taking over outsourced work from U.S. and European multinationals, they're finding that the lowest end of the business -- call centers -- just doesn't pay anymore. While outsourced call centers are here to stay, some are likely to migrate to locales closer to the markets they serve. Some jobs may migrate to the Philippines, which has a close cultural affinity with America 22
Lessons from other industries Employment Thousands Profits $ Millions ROE Percent 16 22 4.5% 1,800 11,200 22.7% 88-861 n/a 32 548 11.1% 23
Country performance comparison Philippines Cost $/hour 5.9 Quality Score 8 Attrition Percent 49% India 8.3 17 163% Canada 11.7 12 120% US 18.3 10 130% 24
The Canadian Cameo Canada 2004 Jobs (iqor) 1,200 Exchange Rate.67 2007 (300) 1.01 India 2004 2007 200 400.022.025 25